Canada’s stronger-than-expected GDP progress in January might pose a problem for the Financial institution of Canada, probably complicating the timing for its anticipated rate of interest cuts.

Financial progress rose 0.6% in January, and early estimates level to a different 0.4% month-to-month rise in February, in line with figures launched by Statistics Canada.

The expansion was largely influenced by a rebound in instructional providers (+6.0%), because of the decision of public-sector strikes in Quebec, whereas goods-producing sectors had been additionally up 0.2% on the month.

Ought to the flash estimate for February maintain, BMO Chief Economist Douglas Porter famous that even a flat studying in March would lead to annualized first-quarter progress of three.5%. That might be nicely above the Financial institution of Canada’s present Q1 forecast for progress of simply 0.5%.

What it means for anticipated charge reduce timing

Whereas economists warning in opposition to studying an excessive amount of into one robust month of knowledge, they agree that if the development continues, it’s more likely to complicate the Financial institution of Canada’s coming financial coverage choices.

For now, markets proceed to count on the Financial institution to ship its first quarter-point charge reduce as early as its June assembly. Nevertheless, bond market pricing for a June charge reduce dropped from 70% to 65% following the discharge of the GDP information.

“The surprisingly wholesome begin to 2024 factors to above-potential progress in Q1, which might make the BoC a bit much less comfy with the inflation outlook,” Porter wrote. “Our name for a June charge reduce nonetheless hinges on the approaching CPI reviews, but when this power in exercise is near replicated into Q2, the BoC will see a lot much less urgency to chop charges any time quickly.”

TD Economics’ Marc Ercolao mentioned the “sturdy” progress figures current a “troublesome problem” for the Financial institution.

“Over the previous two months, the Financial institution has acquired strong proof that inflation is cooperating, however robust GDP information prints like in the present day’s will preserve them on their toes,” he wrote. “Market pricing continues to be hopeful of a primary rate of interest reduce taking place in June, although we expect a July reduce is extra seemingly.”

Inhabitants progress masks weak GDP per capita

In the meantime, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, mentioned the Financial institution of Canada is more likely to “look by means of” the actual GDP studying for January, because of the outsized impression of the rebound in instructional providers.

He added that robust inhabitants progress, fuelled by worldwide migration and a pointy improve within the admission of non-permanent residents, has additionally masked weak point seen in actual GDP progress per capita, which has been on a downward development for the reason that begin of the 12 months.

He notes that the federal authorities’s current announcement that it’s going to scale back the variety of non-permanent resident admissions—to five% of the full inhabitants from 6.2%—will “weaken this materials tailwind to each progress and inflation going ahead.”

“As such, we’re of the view that the Financial institution stays on monitor to start reducing rates of interest at its upcoming June assembly,” he mentioned.